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Impact of firm specific and macroeconomic factors on financial performance

of the UAE insurance sector

Article  in  Global Business and Economics Review · January 2018

DOI: 10.1504/GBER.2018.090091

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248 Global Business and Economics Review, Vol. 20, No. 2, 2018

Impact of firm specific and macroeconomic factors

on financial performance of the UAE insurance sector

Rachna Banerjee
Department of Business,
Higher Colleges of Technology,
Baghdad Street, Al Ghusais,
P.O. Box 16062, Dubai, UAE
Email: rbanerjee@hct.ac.ae

Sudipa Majumdar*
Department of Business,
Middlesex University,
Dubai Knowledge Park,
P.O. Box 500697, Dubai, UAE
Email: s.majumdar@mdx.ac.ae
*Corresponding author

Abstract: This study analyses the impact of firm specific and macroeconomic
factors on the profitability of the insurance sector in UAE during the period of
2009–2013. In the recent past, the global insurance sector was impacted by the
ripple effect of the financial crisis of 2007–2008. Along the lines of the global
trend, although profitability of the UAE, insurance sector witnessed a decline
from 2008–2010, the spur in its growth rates (10%) in 2012 and 2013 is
impressive compared to the negative growth rate in developed markets. Our
research contributes to the existing body of knowledge on financial
performance of the insurance sector post the global financial crisis. Our results
indicate that within the firm specific factors; company size, growth in gross
written premium (GWP), leverage, investment ratio and market share are
statistically significant in explaining profitability of the insurance companies.
Further, GDP growth has a significant positive influence on profitability.

Keywords: insurance sector; gross domestic product; profitability; financial

crisis; United Arab Emirates.

Reference to this paper should be made as follows: Banerjee, R. and

Majumdar, S. (2018) ‘Impact of firm specific and macroeconomic factors
on financial performance of the UAE insurance sector’, Global Business and
Economics Review, Vol. 20, No. 2, pp.248–261.

Biographical notes: Rachna Banerjee holds a PhD in Finance and currently the
Faculty of Business at the Higher Colleges of Technology, Dubai. She has three
years of industry experience and 16 years of teaching experience at university
level. She has presented papers at international conferences and has
publications in peer-reviewed journals. She was awarded with best paper for
her study on profitability determinants of commercial banks in UAE – a sure
model approach at the 3rd Asian Business Research Conference 2014, Insead,
Abu Dhabi. Her areas of research interest are capital markets, banks and
financial institutions.

Copyright © 2018 Inderscience Enterprises Ltd.

 Impact of firm specific and macroeconomic factors 249

Sudipa Majumdar received her PhD in Economics from IGIDR, Mumbai, in

1999. She is presently a Senior Lecturer at the Business School, Middlesex
University Dubai. Since 1999, she has served as a consultant and economist in
international organisations and has been a faculty at reputed universities in
India, South Korea and the UAE. She has several publications in academic
journals and has presented her research at various international conferences.
She was the recipient of the Wharton Business School research grant in 2010
and has won many scholarly awards and honours, including the Best Paper
Award at Insead, Abu Dhabi with Dr. Rachna Banerjee in 2014. Her areas of
research interest are studies on performance, profitability, efficiency and
propensity measures at various firm and industry levels.

This paper is a revised and expanded version of a paper titled, ‘Determinants of

Financial Soundness in Insurance firms: A study of UAE insurers’ presented at
the Third International Conference on Emerging Research Paradigms in
Business and Social Sciences (ERPBSS-2015), Dubai, 24–25 November 2015.

1 Introduction

The insurance industry has an essential role in fostering economic growth of a country
particularly because it gives fillip to the other sectors of the economy such as health,
motor, infrastructure, banking and capital markets. Empirical studies have highlighted
positive correlation between insurance development and economic growth (Enz, 2000;
Arena, 2006). Hence studies analysing the performance of insurance sector have received
considerable attention from researchers in both developed as well as the emerging
economies (Adams and Buckle, 2003; Ahmed et al., 2011; Charumathi, 2012; Kozak,
2011; Mehari and Amerio, 2013; Pervan and Pavić, 2010; Shiu, 2004). In the Middle
East, studies relating to the insurance sector are relatively scarce (Almajali et al., 2012;
Derbali, 2014; Miniaoui and Chaibi, 2014; Najjar, 2012).
Macroeconomic factors such as the GDP growth, population and interest rates
influence the expansion and profitability of the insurance sector. These and other
macro-economic variables have been found to have a significant impact on the insurance
growth of an economy (Beenstock et al., 1988; Browne and Kim, 1993; Fortune, 1973;
Headen and Lee, 1974; Outreville, 1990; Ward and Zurbruegg, 2002).
In the recent past the global insurance sector was impacted by the ripple effect of the
financial crisis of 2007–2008, such as the fall in the global equity markets, decline in the
interest rates and economic slowdown. Although insurance industry in the GCC has
experienced steady growth in the last decade, prolonged global uncertainty has posed
substantial challenges to it by creating volatility in investment values and returns.
However, the combined gross written premium (GWP) in the region has grown at a
CAGR of 11.8% since 2008 to 2012 (Swiss Re, 2010) fuelled by GDP growth,
compulsory health insurance in some jurisdictions and increase in population. UAE is the
largest insurance market in the GCC with over $7.2 billion (Dh26.4 billion) insurance
revenues in 2013, which is approximately 45% of the premiums written in the GCC
(Moody’s Investor service). Further, UAE’s insurance industry grew at an annual average
rate of 9.6% between 2008–2012 and by 10% in 2013 (Insurance Authority, UAE).
250 R. Banerjee and S. Majumdar

Insurance penetration in UAE in 2013 was 2% of its GDP which is higher than most of
the GCC countries but it is far below US and UK which is 8% and 11% respectively.
Performance of the insurance sector is also influenced by a range of internal factors.
There have been studies where factors such as company size, age, underwriting risk,
solvency margin and leverage were found to have a significant impact on company
profitability (Batra, 1999; Ćurak et al., 2011; Ismail, 2013; Majumdar, 1997; Malik,
2011; Shiu, 2004;). However there are few studies that have analysed the financial
performance of the UAE insurance sector after the financial crisis in 2007–2008. Further
to the author’s knowledge no studies have explored the impact of both internal and
macroeconomic factors on profitability of insurers.
Along the lines of the global trend, although profitability of the UAE insurance sector
witnessed a decline from 2008–2010 (Figure 1) it is interesting to note that the spur in
growth rates achieved in 2012 and 2013 is impressive compared to the negative growth
rates in two big markets namely Japan (–7%) and US (–6%). Despite the healthy growth
rate, IMF and multiple rating agencies have considered UAE’s insurance industry
overcrowded which has an unfavourable impact on the market’s overall performance. In
2013 insurance authority has proposed a slew of regulations for consolidation and further
strengthening of the sector.
In the light of above discussion, it may be noted that 2009–2013 has been an
interesting period with a series of developments in the UAE insurance sector with
reference to its financial performance and the macroeconomic environment in the
country. Hence, it is imperative to analyse the factors which have influenced the
profitability of the insurance sector in UAE during this period.

Figure 1 Average ROA from 2008–2013 (see online version for colours)

2 Objective

The purpose of this paper is to determine the macroeconomic and firm specific factors
which impact the profitability of the UAE insurance sector from 2009–2013. The
macroeconomic factors selected for the study are GDP per capita, inflation and stock
 Impact of firm specific and macroeconomic factors 251

market general index. Internal factors include, size, growth in GWP, market share,
leverage, solvency margin, investment ratio, risk retention ratio and loss ratio. Financial
performance is proxied by return on assets (ROA).
The rest of the paper is structured as follows. The following section presents literature
review of related studies. The research methodology is described in Section 4 and Section
5 discusses the data analysis and findings. Our conclusions are presented in the Section 6
and the last section summarises the limitations of this study and future research.

3 Literature review

There is a vast literature available on the determinants of financial performance of the

insurance sector in the US, UK and other developed economies. Some of the earliest
studies on the determinants of profitability of the insurance sector in the US was
conducted by Wright (1992) on the economic and regulatory issues of the life insurance
companies where he argued that actual mortality experience, investment earning, capital
gains and losses, the scale of policyholder’s dividends and federal and state taxes affects
the economic performance of insurance companies. Thereafter, studies conducted on the
relationship between profitability and market structure, authors found a significant
positive impact of concentration on profitability (Bajtelsmit and Bouzouita, 1998;
Chidambaran et al., 1997; Choi and Weiss, 2005; Cole et al., 2015; Dafny et al., 2010).
However most of them were unable to provide evidence on whether this positive
relationship was due to collusion among the insurers or efficient operations.
Studies relating to impact of firm-specific factors on the financial performance of
insurance sector in the developed economies include analysis of Bermuda insurance and
reinsurance companies during the period 1993–1997 where leverage and company type
were found to be positively related to company performance while risk and liquidity were
negatively related (Adams and Buckle, 2003). Further, authors that examined the impact
of firm specific, industry specific and macroeconomic variables on the Croatian insurance
market performance found that the significant factors included ownership, expense ratio,
inflation, underwriting risk, size and equity returns (Ćurak et al., 2011; Pervan and Pavić,
2010).
In a study on the general insurance sector in Poland during 2002–2009 using the
regression model, the results showed that reduction in motor insurance with simultaneous
increase of other types of insurance, growth in gross premium, operating cost reduction,
GDP growth and market share growth for foreign companies has a positive impact on
profitability and cost efficiency whereas offering too broad spectrum of classes of
insurance has a negative impact (Kozak, 2011). Burca and Batrinca (2014) used fixed and
random effects model in their study and showed evidence of significant impact of growth
in gross premium along with other factors viz. leverage, size, underwriting risk, risk
retention ratio and solvency margin on the financial performance of the Romanian
insurance market.
In the context of emerging markets, Charumathi (2012) studied the impact of six
independent variables on the financial performance of the Indian life insurers and
concluded that size and liquidity have significant and positive influence while leverage,
growth of GWPs and volume of equity have a negative and significant influence. Similar
results were shown with respect to size and leverage in a study on the Pakistan insurance
252 R. Banerjee and S. Majumdar

market which also found that volume of capital and loss ratio had a significant impact on
the financial performance (Malik, 2011).
Contradictory to the above results, in a study of Ethiopian insurance sector
performance by Mehari and Aemiro (2013) GWP and liquidity were found to be
insignificant while size, loss ratio, tangibility and leverage were shown as significant
factors. Ismail (2013) conducted a study on the general Islamic and conventional
insurance companies in Malaysia where investment yield is used as the measure of
financial performance. Using three models of panel data estimation the author found that
size, retakaful/reinsurance dependence and solvency margin are statistically significant
with the general Islamic insurance companies. The above mentioned factors along with
interest rate levels, liquidity and premium growth were significant for the financial
performance of conventional insurance companies.
The Middle East insurance market has been getting attention from researchers in
more recent times in the event of the regulatory and structural changes in these
economies. Almajali et al. (2012) analysed the insurance companies listed on the Amman
Stock Exchange during 2002–2007 using multiple regressions and found that liquidity,
leverage, company size and management competence index have a statistical positive
effect on insurers. A study on determinants of financial performance of the Tunisian life
insurance companies concluded that height, age and premium growth are significant for
performance measured by ROA whereas leverage, tangibility, liquidity and risk have no
significant impact (Derbali, 2014). In a study analysing the impact of corporate
governance mechanisms on financial performance of Bahrain insurance firms, Najjar
(2012) observed that board size, firm size and number of block-holders have a significant
impact on firm performance expressed by return on equity (ROE).
In UAE, Rao et al. (2010) analysed efficiency and productive issues of insurance
sector during the period 2000–2004 by using ‘administrative and general expenses’ and
‘equity and change in legal reserves’ as inputs. Applying DEA model, the authors found
considerable degree of managerial inefficiency among the insurers.

4 Research methodology

Our research contributes to the existing body of knowledge on financial performance of

insurance sector post the global financial crisis, by exploring the impact of firm specific
and macroeconomic factors on the UAE insurance sector which has not yet been studied.
The research questions addressed in this paper are:
• Which are the firm specific variables that impact financial performance of the
insurance sector?
• Whether the macroeconomic variables effect financial performance of the insurance
sector during the period 2009–2013.
• What was the overall impact of the firm specific and macroeconomic variables on
the profitability of the insurance sector in UAE during the selected period?
 Impact of firm specific and macroeconomic factors 253

4.1 Sample
This study attempts to analyse the determinants of the financial performance of the
insurance market in the United Arab Emirates. The research was based on secondary data
obtained from the audited annual report of 20 insurance companies in the United Arab
Emirates that are listed on the two stock exchanges, namely the Abu Dhabi Securities
Market and the Dubai Financial Market. 11 companies were listed in Abu Dhabi and nine
were listed in Dubai.
Since we considered a balanced panel data, 20 companies were selected for the study
out of the total listed companies. Consequently, companies listed after 2008 were not
included in the study.
Secondary data was obtained from annual reports of each individual company for
each financial year, the Arab Stock Market Analysis database, and various press releases
by each insurance company. The data for macroeconomic indicators was accessed from
the International Monetary Fund and the World Bank websites.
These variables are described and defined in Table 1. Financial performance of
insurers has been proxied by the dependent variable ROA. Although researchers in the
past have considered various measures for company financial performance for their study
such as ROA, ROE [return on sales, economic value added (EVA)] but ROA has been
most widely used financial performance indicator in studies on insurance
(Agiomirgiannakis et al., 2006; Ahmed et al., 2011; Burca and Batrinca, 2014; Chen
et al., 2009; Ćurak et al., 2011; Liebenberg and Sommer, 2008). ROA is an indicator of
the efficiency with which a firm uses its total assets measuring net profit generated for
each dirham of net assets.
Table 1 Description of company-specific and macroeconomic variables

Variable Definition
ROA Return on total assets ratio
SIZE Log of total assets
LEVERAGE Net technical reserve/equity
GWP_GR Growth in gross written premium
INV_RATIO Investments/total assets
MKT_SHARE GWP/total GWP for all companies
LOSS RATIO Gross claims/GWP
RETRISK_RATIO Net written premium/GWP
PC_GDP Per capita GDP
INFLATION Inflation rate
INVT_GDP Investment-GDP ratio
SECURITY Log UAE general index
EIBOR Emirates Interbank offered rate
254 R. Banerjee and S. Majumdar

The firm specific and macroeconomic variables used in this study are selected based on
the relevant theory and literature. Size, growth in GWP, market share, leverage, solvency
margin, investment ratio, risk retention ratio and loss ratio are the firm specific variables
that have been in a vast number of studies on determinants of a financial performance of
insurers (Almajali et al., 2012; Charumathi, 2012; Derbali, 2014; Mehari and Aemiro,
2013).
GDP per capita is one of the macroeconomic factors included in this study and needs
a special mention here. There are some studies which have included real GDP growth
while a few other studies have considered the GDP per capita. Beck and Webb (2002)
argued that countries with large GDP per capita have high life insurance consumption
(Sen and Madheswaran, 2007). In another study by Bhatia and Jain (2013) GDP per
capita was found to be highly correlated with insurance penetration, density and absolute
amount of premium. In yet another study on the determinants of financial performance of
insurers, the authors have included gross national income (GNI) per capita as one of the
macroeconomic variables (Doumpos et al., 2012).

4.2 Model specification

As explained earlier, this study included the data from 2009 to 2013 since the objective
was to study the performance indicators for the insurance companies during the recession
years (2009–2010) and to investigate the factors that played an important role during the
recovery period (2011–2013). The data was analysed using Econometric Views (EViews)
software. In the estimation procedure, we use the Robust Least Squares iterative
re-weighted method using Huber’s M-estimator.

5 Findings and discussion

5.1 Descriptive Statistics

The assumption of normality needs to be checked before performing any statistical
procedures, namely parametric tests, because their validity depends on it. As it can be
seen from Table 2, almost all the variables are asymmetrical and the kurtosis value of
almost all variables shows that our data is not normally distributed (values of kurtosis are
deviated from 3). Based on the calculated Jarque-Bera statistics and the corresponding
p-values, the null hypothesis of normality is rejected by our data.
Table 2 Descriptive statistics of the company-specific variables

Mean Median Std. dev. Skewness Kurtosis Jarque-Bera Probability

ROA 3.5391 3.995 4.8242 –2.0694 10.6974 381.9112 0.0000
SIZE 9.008 8.977 0.362 0.352 2.0225 7.256896 0.0265
LEVERAGE 38.939 28.008 32.1267 1.8865 6.9959 151.0182 0.0000
GWP_GR 0.0661 0.054 0.1914 0.0397 4.0217 5.251453 0.0724
INVT_RATIO 0.4173 0.401 0.2098 0.1388 2.2840 2.947919 0.2290
MKT_SHARE 4.878 2.888 5.1786 1.6881 4.7653 72.57718 0.0000
RETRISK_RATIO 0.534 0.518 0.230 2.394 11.0083 435.3214 0.0000
LOSS RATIO 0.579 0.535 0.246 1.612 9.8790 288.6140 0.0000
 Impact of firm specific and macroeconomic factors 255

Once the normality assumption was rejected, the next step was to investigate if the
non-normality was due to presence of outliers. The choice of the estimation technique
would depend on the nature of the dependent variable – in our case, the ROA. The
box-plot of the ROA in Figure 2 supported our hypothesis of the presence of outliers.

Figure 2 Box Plot of ROA (see online version for colours)

5.2 Estimation
In the presence of outliers, one solution is to screen the data, remove outliers and then
apply classical inferential procedures. However, rejection of outliers in the analysis
implies that the value of the arithmetic mean changes since the mean is shifted in the
positive direction of the outlier. Therefore, it is always better to down-weight outliers
rather than reject them from the dataset unless they can be categorised as being
completely wrong observations. Moreover, rejecting outliers reduces the sample size,
could affect the distribution and variances could be underestimated from the cleaned data.
Empirical evidence shows that good robust procedures give very reliable estimates by
providing stable results in the presence of outliers. ‘Robust least squares’ (RLS) refer to a
variety of regression methods designed to be less sensitive to outliers. The most
commonly used method today is the M-estimation under the RLS technique which was
introduced by Huber (1973) that substantially improves the ordinary least squares (OLS)
results. Instead of minimising a sum of squares, a Huber-type M-estimator minimises a
256 R. Banerjee and S. Majumdar

sum of less rapidly increasing functions of the residuals by using iteratively re-weighted
least squares (IRLS).
The OLS is computed by finding coefficient values that minimise the sum of the
squared residuals:
N
βˆ = min ∑ r (β )
i =1
i
2

where r is the residual function. Since the residuals ri are getting squared, the effects of
outliers are magnified as well. So, in the presence of outliers, we use the M-estimator
which introduces a function that provides less weight to outliers so that:
N
⎛ ri ( β ) ⎞
βm
M = min ∑ ρ ⎜⎝ σw
i =1 i ⎠
⎟

where σ is a measure of the scale of the residuals and wi are individual weights that are
generally set to 1 for OLS, but are set to:

wi = 1 − X i ( X ′X ) X i′
−1

So that the observations of the dependent variable, with the large outliers, get
down-weighted. The estimate is calculated using a sequential procedure which calculates
the σ at each stage and uses it to recalculate the β, until a convergence is reached. This
iterated reweighted least-squares method.
Another point to be noted is that the coefficient of determination gets updated as well
since both the R2 and the adjusted R2 can be highly sensitive and upwardly biased
depending on the estimation technique. Renaud and Victoria-Feser (2010) proposed the
Rw2 statistic to be a better measure of fit than the robust outlined above.

5.3 Estimation results

Our results clearly indicate that within the firm specific factors; company size, growth in
GWP, leverage, investment ratio and market share are statistically significant in
explaining profitability of the insurance companies.
Leverage has a negative impact on profitability of insurers in UAE which is
consistent with most of the previous studies (Adams and Buckle, 2003; Browne et al.,
2001; Malik, 2011). This result indicates that a further increase in leverage will have an
adverse effect on profitability. A high ratio of technical reserves to equity implies that the
equity cushion available is inadequate to support any increase in potential liabilities that
exceeds its reserves and may lead to insolvency. The importance of technical reserve was
highlighted by Kannou (2007) stating that a low solvency margin may be sufficient if the
reserving policy is very prudent whereas a higher solvency margin may be inadequate if
the technical provisions are low.
Evidently GWP growth has a positive impact on profitability which is significant at
1%. Similar results were found by Moro and Anderloni (2014), Burca and Batrinca
(2014), Kaya (2015) and Kozak (2011). Further, in this regard Leflaive (2001) opines that
a company’s growth entails special risk if it is excessively or poorly coordinated and if
risk selection and pricing is not done with necessary care. The positive influence of
 Impact of firm specific and macroeconomic factors 257

premium growth has been contributed by increase in underwriting activity in UAE. This
finding implies a well-coordinated growth and proper pricing by the UAE insurers.
Profitability is also significantly influenced by market share. This result is consistent with
Gale’s (1972) argument that high market share might result in high profit, mainly because
high market share boosts a firm’s market advantage and its ability to set prices, which
helps the firm to boost profit and achieve economies of scale. In the case of UAE
insurance firms, increase in premium growth led to the increase in market share.
Dependent variable: ROA
Method: Robust least squares
Included observations: 120
Method: M-estimation
Huber type I standard errors and covariance
Variable Coefficient Std. error Z-statistic Prob.
LEV=NTR_EQ –0.042920 0.008899 –4.823087 0.0000***
SIZE –4.698974 1.384678 –3.393551 0.0007***
GWP_GR 3.146443 1.554692 2.023837 0.0430**
MKT_SHARE 0.232622 0.103836 2.240280 0.0251**
INVT_RATIO –3.383086 1.287206 –2.628240 0.0086***
RETRISK_RATIO –0.432251 1.161625 –0.372109 0.7098
LOSS_RATIO –1.408963 0.994942 –1.416126 0.1567
PCGDP 0.000457 0.000227 2.009885 0.0444**
INFLATION –0.184612 0.110099 –1.676781 0.0936*
INVT_GDP 0.201805 0.229392 0.879738 0.3790
SECURITY –3.030201 7.771156 –0.389929 0.6966
EIBOR 0.835179 0.718688 1.162089 0.2452
Robust Statistics
R-squared 0.202333 Adjusted R-squared 0.121089
Rw-squared 0.432055 Adjust Rw-squared 0.432055
Akaike info criterion 179.5008 Schwarz criterion 218.3998
Deviance 751.2225 Scale 2.160424
Rn-squared statistic 392.4767 Prob(Rn-squared stat.) 0.000000
Notes ***Indicate significance at 99% level; **indicate significance at 95% level;
*indicate significance at 90% level.
Contrary to expectations, our study reveals that firm size has a negative impact on
financial performance which is significant at 1%. According to Athanasoglou et al.
(2008) the effect of a growing size of a bank on profitability has been proved to be
positive to a certain extent. However, for firms that become extremely large, the effect of
size could be negative due to bureaucratic and other reasons (Li, 2007). In a study on
Bermuda insurance market, Adams and Buckle (2003) found that size was negatively
related with the performance of the insurance companies, but these results were
insignificant (Almajali et al., 2012; Fenn et al., 2008; Moro and Anderloni, 2014). This
result implies the possibility that big companies have grown beyond the technical optimal
258 R. Banerjee and S. Majumdar

level and have high operating expenses. The reinsurance dependencies of most of the big
firms have gone up since 2009 to protect themselves from insolvency risk. However, this
increases costs associated with reinsuring underwriting risk and results in a huge chunk
of the premium being ceded in reinsurance which substantially reduces the net written
premium and profits.
Further, profitability is influenced significantly by investment ratio. The negative
impact of this ratio may be due to the investment mix of the firms which is skewed
towards real-estate and equity. The values of these assets have taken a severe beating due
to real estate and stock market crash in the aftermath of the financial crisis.
Within the macro-economic variables, inflation has a negative impact on profitability
which is significant at 1%. Most of the past studies have found similar result on the
impact of inflation on financial performance (Browne et al. 2001; Ćurak et al., 2011;
Pervan and Pavić, 2010; Shiu, 2004). It is observed that the decrease in inflation rate
during the post-crisis contributed to the rebound in the profitability of the insurance
sector. Further, GDP growth has a significant positive influence on profitability. This
result is consistent with other studies on the impact of macro-variables on insurance
firms’ profitability (Ahmed et al., 2011; Kozak, 2011). It is noteworthy to mention that
when the per capita GDP of UAE was negative in 2009, the firm profitability was also
declining compared to the pre-crisis level but with a gradual rise in GDP growth rate was
there was a recovery in the profitability.

6 Conclusions and recommendations

This study attempts to analyse the determinants of the financial performance of the
insurance market in the United Arab Emirates. Both internal and macro-economic
variables have been included in the study. The macroeconomic factors selected are GDP
per capita, inflation and stock market general index. Internal factors include, size, growth
in GWP, market share, leverage, solvency margin, investment ratio and loss ratio. The
impact of leverage, size and growth in GWP on the firm profitability is significant.
Further, per capita GDP has a positive and significant impact on profitability while the
effect of inflation is significant with a negative sign. Risk retention ratio and loss ratio are
insignificant in explaining financial performance of UAE insurance sector.
The UAE insurance firms should focus on the above internal factors for improving
their financial performance. Volume of assets should not be increased further owing to
the adverse impact of size on profitability. Firms need to maintain adequate and
appropriate technical reserves according to the nature of their potential liabilities. This
necessitates that the assessment should be done by specialists such as an actuary. Further,
companies should focus on improving their asset quality by limiting their investment in
risky asset classes and include more government securities, cash and deposits in their
investment mix.
It is further suggested that the minimum capital requirement of Dhs100 million may
be increased which will encourage the insurers to retain the premium and reduce the
reinsurance dependency.
In line with the international best practices, the insurance authority (IA) has issued
regulations in February 2015 for standardising the process of calculating the technical
provisions which includes the companies requiring that the assessments be done by
actuaries and also set limits for exposure to equity, derivatives and real estate. Once these
 Impact of firm specific and macroeconomic factors 259

regulations are implemented across the companies, it will contribute to the robustness of
the insurance sector which in turn will enhance the contribution of the sector to the
economic growth of the nation.

7 Future research

This study is country specific and therefore may be extended to include other GCC
countries to analyse the determinants of financial performance across the region. Further
research may also include the impact of mergers and acquisition on firm performance as
the middle-east market has witnessed several mergers announcements in the recent past.

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